Thursday, June 12, 2008

$250 per barrel "in the foreseeable future"?

It seems more and more these days that everything seems to be coming apart at the seams. That is not to be unexpected in an interconnected world that apparently is operating at some very critical physical limits and in which the impacts of human activity are more profound than ever.

On the other hand it is difficult to guess what society's reaction would be if oil were to reach $250 per barrel as recently predicted by a Russian oil executive. One thing that seems certain is that it would surely exceed just about everyone's tipping point. (GW)An ominous warning that the rapid rise in oil prices has only just begun

The chief executive of the world's largest energy company has issued the most dire warning yet about the soaring the price of oil, predicting that it will hit $250 per barrel "in the foreseeable future".

The forecast from Alexey Miller, the head of the Kremlin-owned gas giant Gazprom, would herald the arrival of £2-per-litre petrol and send shockwaves through the economy. His comments were the most stark to be expressed by an industry executive and come just days after the oil price registered its largest-ever single-day spike, hitting $139.12 per barrel last week amid fears that the world's faltering supply will be unable to keep up with demand.

Mr Miller's prediction is well beyond even the most heady market forecasts, the most extreme of which fall between $150 and $200 per barrel, and was explained only by vague references to demand from the developing world. It nonetheless stoked an already febrile atmosphere of growing public anger across Europe over a soaring fuel cost that is wreaking havoc at nearly every level of the economy.

The British Government was urging motorists yesterday not to panic-buy petrol in anticipation of a strike on Friday by lorry drivers who deliver petrol to forecourts for Royal Dutch Shell, assuring motorists that contingency plans would ensure sufficient supplies.

In Spain, the regional government of Catalonia enacted an emergency action plan to bring in fresh food and fuel supplies after nearly half of its forecourts ran dry and supermarkets shelves were left bare. The situation was the result of the second day of an "indefinite" nationwide strike staged by lorry drivers in Spain seeking their government's help to contain the effects of expensive petrol. Scattered protests by drivers and fisherman in France and Portugal also continued yesterday.

In a speech to the European Business Congress in Deauville, France, Mr Miller offered little prospect of relief. He warned that the world was experiencing a fundamental shift in energy prices that will end at a "radically new level. We expect that the oil price will approach $250 per barrel in the foreseeable future".

Philip Shaw, an economist at Investec Securities, warned that oil at that level would exert an extraordinary drag on the economy at a time when it is already decelerating at a rapid rate. "The word is ouch," he said. "Forecasts are forecasts though, and I think it should be treated with some level of scepticism."

The most visible result of $250 oil would be at the petrol pump, which is already at a record 116.9 pence per litre for unleaded. Because more than half of that price, about 68p, is due to duty and taxes, the general rule of thumb is that each $2 increase for oil means a 1p increase of petrol at the pump. Oil at $250 a barrel would mean an increase of almost 60p in petrol prices, even before VAT.

The price of everything from food to energy would see significant price rises. Household electricity and gas bills are particularly vulnerable. Power companies have begun warning of a second round of major tariff increases for household bills this year that they say they will need to push through just to break even.

Mr Miller placed some of the blame on financial speculators for oil's price rise – it has more than doubled in the past year – but said that the primary reason is simple supply and demand, driven by the rapidly expanding countries of the developing world, principally China and India.

It is a view shared by the International Energy Agency. In its monthly oil report, the developed world's energy watchdog said yesterday that the "abnormally high prices [for oil] are largely explained by fundamentals". But whether the price of oil will reach $250 is uncertain at best. Most expect it to reach a breaking point before that figure. The IEA said that the high price would eventually "choke off" demand and a balance between supply and demand would return.

What is certain is that for Europe, Mr Miller's role will become increasingly important as head of the continent's single biggest gas supplier. He also warned against "protectionist tendencies" in Europe, where worries have grown that the company is being used as a blunt negotiating tool of the Kremlin. "The relationship between Gazprom and Europeans is one of mutual dependence. We rely as much on European consumers as they depend on us," he said.

"In all frankness, I am concerned about certain protectionist tendencies resurfacing in the EU ... How wise it is that the European Commis